Phillip Securities Research 2015-07-15: Soilbuild Business Space REIT - DPU growth delivered in a rewarding quarter. Maintain BUY.

DPU growth delivered in a rewarding quarter. 

  • 7.7% y-o-y DPU growth achieved mainly by acquisitions and with rental reversions. 
  • Average rental reversions of 5% for lease renewals in 2Q15. 
  • Near-full portfolio occupancy of 99.8% and WALE of 4.9 years. 
  • Maintain Buy. 
  • Since we initiated coverage on Soilbuild Business Space REIT ("SBREIT") in March earlier this year, Unit price has appreciated 8.8% from S$0.80. 
  • Coupled with 1HFY15 DPU of 3.248 Cents, giving Unitholders 12.8% total return over the period. 

What is the news? 

  • SBREIT announced its 2Q FY15 results on 14 July after trading hours. We tuned in to the Analyst Briefing conference call earlier this morning. 

Analyst briefing key takeaway 

 Occupancy remains high, but there are some confirmed non-renewals. 

  • Portfolio occupancy is at 99.8%. Multi-tenanted buildings (Eightrium & Tuas Connection) are 100%-occupied, except for West Park BizCentral at 95.1%. 
  • Portfolio occupancy may be lower in 3Q15 if no new leases take up the vacated space. (11.8% outstanding lease expiring in 2015.) 

 Target gearing will remain 35%-40%. 

  • The Manager shared that the comfortable level of gearing would remain between 35% and 40%, occasionally (and temporarily) slightly exceeding 40%. (MAS will allow up to 45% under the new guidelines.) 

 Manager is actively managing debt profile. 

  • The Manager is in active discussions with banks to refinance loans maturing in 2016 and 2017, to extend the maturity to 2020. This would result in earliest debt maturity in 2018. 

How do we view this? 

 Well-positioned for inorganic growth through acquisition. 

  • SBREIT's gearing is currently at 36.3%, with a debt headroom of S$75 million based on a target leverage of 40% gearing. 

 What to look out for in 3Q15. 

  • All things equal, Gross Revenue is expected to have y-o-y growth, due to contributions from KTL Offshore, Speedy-Tech (both acquired in 4Q14) and Technics (acquired in 2Q15). 

 Portfolio tenancy risk. 

  • Challenging outlook to fill vacated spaces in the multi-tenanted properties. 

Investment Actions 

  • We like SBREIT for its exposure to niche Business Park spaces and its ability to grow the portfolio inorganically through acquisition with its remaining debt headroom. 
  • We leave our forecasts unchanged, but raise our estimate for cost of equity from 6.5% to 6.9%. This results in a lower DDM valuation of S$0.960 (Previous: S$0.995). 
  • Maintain Buy. 

Relative valuation 

  • We compare SBREIT against peers with exposure to Business Park space in their respective portfolios. SBREIT is relatively under-valued and has a higher historical yield than the larger market capitalised Industrial S-REITs. 
  • These two factors suggest there is still room for yield compression for SBREIT. 

Investment Merits for SBREIT 

 Significant exposure to Business Park space. 

  • 38.7% by portfolio valuation (as of 2Q15), benefitting from the secular trend of decentralising of business activities outside of the City. 

 Strong alignment of interest between Manager and Unitholders. 

  • Base fee is pegged to Distributable income, while Performance fee is pegged to DPU growth. 

 Best-in-class portfolio that has 99.8% occupancy. 

  • Properties are strategically located, relatively young (weighted average age of 5.8 years) and of high quality design. This has resulted in strong tenant demand from good quality tenants, giving stability to property income for the portfolio. 
  • The portfolio also enjoys the longest underlying land lease expiry (46.5 years) among its Industrial S-REIT peers. 

(Richard Leow, CFTe)